The great economist John Maynard Keynes became a brilliant investor only after switching his approach to backing individual companies rather than playing broad trends. Warren Buffett has the same approach, telling us trying to read the big picture is just too hard. But sometimes waves are so obvious you’ve got to take notice. Like in South African retail property where simple observation shows us oversupply is growing. In recent years, investors have reacted rationally – as returns firmed on lower interest rates, massive investments were made, the latest to come to market being Attacq’s Mall of Africa which opened today. So has one of the nation’s most admired property developers got it wrong? Not necessarily. Deferring again to Keynes and Buffett, they tell us to look beyond the obvious. Buying an SA property index fund right now is quite clearly risky. But targeting – or keeping – plums can still deliver superior returns. Even in a generally oversupplied market, there will always be spots of excellence. Visit the Rosebank Mall/Firs/Zone complex on weekends or holidays and you’ll quickly see what I mean. Similarly, instead of being its death knell, The Mall of Africa could quite possibly take Attacq to a higher level. – Alec Hogg
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(Bloomberg) — When Attacq Ltd. snipped the ribbon on its Mall of Africa in Johannesburg on Thursday, it added to an oversupply of retail space that threatens to topple the best returns among South Africa’s real estate investment trusts.
The 5 billion-rand ($345 million) center north of the city will add 130,000 square meters (1.39 million square feet) of stores, the largest first-phase mall development in southern Africa, according to Attacq. South Africa has more than 23 million square meters in shopping center space, placing it 7th globally and ahead of all the countries in continental Europe, with another 2 million square meters under construction or planned, according to Urban Studies, a Johannesburg-based property market research firm.
“There might be a general oversupply in the country, but in specific areas, like Waterfall where the mall is located, there is still a huge need,” said Louis van der Watt, chief executive officer of Atterbury Property Holdings Ltd., the company that spun out Attacq in 2013 and owns 20 percent of the center. “There are approximately 100,000 households in the immediate surroundings without adequate shopping facilities.”
Defying Slowdown
The roll-out of new malls and an acceleration in consumer spending is defying the slowest expansion in gross domestic product since the 2009 recession, the highest interest rates in six years and an unemployment rate of about 25 percent. It cannot last, and rising inflation and the deteriorating economy will eventually take its toll, said Zandile Makhoba, an analyst at real estate services firm Jones Lang LaSalle Inc. in Johannesburg.
“Retail shouldn’t be doing as well as it currently is and that should be concerning us,” she said. “A lot of the new developments are in proximity to existing malls, which suggests they’ll be competing for the same consumers, who are most likely to be less willing to spend as economic conditions get tighter.”
The oversupply of retail properties will probably result in slowing growth or a decline in foot traffic as new malls open before the centers experience an increase in vacancies, Makhoba said. The South African Property Owners Association estimates vacancies of less than 3 percent in the country’s malls.
Those risks aren’t hampering the performance of companies that build and operate shopping centers, which are the best-performing South African REITs this year. Redefine Properties Ltd., which owns the Centurion Mall in Pretoria, leads the pack with a 23 percent return through Monday’s close, while Hyprop Investments Ltd. is returning 16 percent. Attacq and Resilient REIT Ltd. have returned 17 percent and 16 percent in 2016. That compares with 4.5 percent for the FTSE/JSE Africa All Share Index and 7.8 percent in bonds.
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Super Centers
“Resilient and Hyprop own portfolios of dominant regional and super-regional shopping centers that have historically been among the most defensive during tougher economic times like now,” said Neil Stuart-Findlay, who helps manage the Cape-Town based Investec Property Equity Fund, which has 5.5 billion rand in assets. “These centers are typically underpinned by a high proportion of national tenants with solid balance sheets and they often enjoy tenant waiting lists.”
REITs that favor office and industrial space are among the worst performers on the FTSE/JSE SA Listed Property Index, with Emira Property Fund Ltd. losing 2.8 percent, while Investec Property Fund Ltd., which is a separate company to the money manager that Stuart-Findlay works for, has returned 2.1 percent this year.
Mall Culture
South Africa has a mall culture where most people living in suburbs shop, dine and go out for the night, mainly because of security concerns. A growing middle class in the continent’s second-largest economy combines with the world’s highest inequality rating, making it one of the most dangerous countries outside a war zone for incidences of crime like car hijackings, armed robberies and rape.
The current influx of new shopping centers reflects the length of projects and how some developers “pull the trigger” at the top of the business cycle and deliver the completed centers in a downturn, said Marvin Nair, head of new business in real estate finance at Standard Bank Group Ltd. in Johannesburg.
“There is retail space oversupply in particular in the metropolitan areas because of the economic downturn,” Urban Studies partner Dirk Nico Prinsloo said. “That should subside within two years because of population and potential employment growth.”
